The Fiscal Cliff Is Steep? Try The Entitlements Cliff

Putting Paul Ryan on the GOP ticket ensured that the presidential campaign focused at least some attention on Medicare's fiscal challenges. But that debate barely touches the scope or depth of the entitlement challenges facing the U.S. economy.

The "fiscal cliff" coming at the end of the year pales in comparison to the "entitlements cliff" being forced on us by a multitude of entitlement programs that we can no longer afford.

Most people think of entitlement programs as Social Security and Medicare for seniors, Medicaid and perhaps some other means-tested welfare programs. But there are many more, including veteran benefits, unemployment, the children's health insurance program, disability income, the GI bill and Head Start.

The U.S. Census Bureau says 108 million Americans live in households where at least one person participates in a means-tested program. We estimate about 80 million are the primary recipients, though millions more share those benefits. That number has been growing rapidly under President Obama. Since the president took office:

 Medicaid has grown from 46.9 million to 56 million people.

 Disability beneficiaries have increased from 7.5 million to 8.8 million.

 The food-stamp program has grown from 32 million Americans to 47 million.

Add to those 80 million beneficiaries roughly 40 million Americans age 65 or older on Social Security and Medicare (about 9 million of the 49 million on Medicare, including some under age 65, also receive means-tested benefits). That 120 million does not include the numerous smaller entitlement programs. Put them all together and a number approaching half of the country participates in an entitlement program.

Who Is Paying?

Now add in the 16 million new Medicaid beneficiaries thanks to ObamaCare, plus an estimated 12 million people who enter the health insurance exchanges by 2014, where most will receive federal subsidies.

The budget implications of these programs are enormous. For fiscal 2012, the country spent roughly $2.2 trillion of its $3.7 trillion budget on entitlement programs — about $400 billion less than the $2.6 trillion in gross annual revenues. Oh, and interest on the federal debt was $220 billion.

Thus, the cost of entitlement programs plus interest on the debt are nearly equal to total federal revenues today. Virtually everything else the government does is with borrowed, or printed, money.

Entitlement spending is also growing much faster than the economy. Since 1980, Social Security and the various income security programs have grown at an average annual rate of 6%, while Medicare and Medicaid have both grown at more than 9% annually, which includes population growth.

Putting Paul Ryan on the GOP ticket ensured that the presidential campaign focused at least some attention on Medicare's fiscal challenges. But that debate barely touches the scope or depth of the entitlement challenges facing the U.S. economy.

The "fiscal cliff" coming at the end of the year pales in comparison to the "entitlements cliff" being forced on us by a multitude of entitlement programs that we can no longer afford.

Most people think of entitlement programs as Social Security and Medicare for seniors, Medicaid and perhaps some other means-tested welfare programs. But there are many more, including veteran benefits, unemployment, the children's health insurance program, disability income, the GI bill and Head Start.

The U.S. Census Bureau says 108 million Americans live in households where at least one person participates in a means-tested program. We estimate about 80 million are the primary recipients, though millions more share those benefits. That number has been growing rapidly under President Obama. Since the president took office:

 Medicaid has grown from 46.9 million to 56 million people.

 Disability beneficiaries have increased from 7.5 million to 8.8 million.

 The food-stamp program has grown from 32 million Americans to 47 million.

Add to those 80 million beneficiaries roughly 40 million Americans age 65 or older on Social Security and Medicare (about 9 million of the 49 million on Medicare, including some under age 65, also receive means-tested benefits). That 120 million does not include the numerous smaller entitlement programs. Put them all together and a number approaching half of the country participates in an entitlement program.

Who Is Paying?

Now add in the 16 million new Medicaid beneficiaries thanks to ObamaCare, plus an estimated 12 million people who enter the health insurance exchanges by 2014, where most will receive federal subsidies.

The budget implications of these programs are enormous. For fiscal 2012, the country spent roughly $2.2 trillion of its $3.7 trillion budget on entitlement programs — about $400 billion less than the $2.6 trillion in gross annual revenues. Oh, and interest on the federal debt was $220 billion.

Thus, the cost of entitlement programs plus interest on the debt are nearly equal to total federal revenues today. Virtually everything else the government does is with borrowed, or printed, money.

Entitlement spending is also growing much faster than the economy. Since 1980, Social Security and the various income security programs have grown at an average annual rate of 6%, while Medicare and Medicaid have both grown at more than 9% annually, which includes population growth.

Who is paying for all of those benefits? Well, not some 70 million children who don't work or have low-paying, part-time jobs. Nor are those 40 million seniors paying much in taxes.

Nor are low-income workers. According to the Tax Foundation, of the 143 million tax returns in 2010, 48% had income of less than $30,000. Those making $50,000 or more pay 46% of all income taxes.

Getting Steeper

The economic implications of these facts are brutal. Expenditures of $2.2 trillion for 120 million-plus entitlement beneficiaries equals nearly $18,000 per beneficiary.

According to the Tax Policy Center, 53.6% of households pay both income and payroll taxes, while 28.3% pay only the payroll tax. Thus some 76.6 million tax filers are bearing the full weight of our entitlement culture, while another 40 million are only paying the payroll tax.

And that number is beginning to decline. The estimated 77 million baby boomers (born between 1946-1964) are beginning to retire at an estimated 10,000 people every day, as they transition from being taxpayers to net benefit recipients.

Attempting to collect enough money to sustain this level of entitlement spending will only result in a reduction in work effort, reduced employment opportunities and more people moving onto entitlements.

Given the financial challenges imposed by our entitlement programs, the candidates should be explaining what they would do to address those problems. GOP candidates Mitt Romney and Paul Ryan discussed Medicare and to some extent Medicaid, but largely avoided the other entitlement programs.

All the president is doing is making the entitlement cliff even steeper. Every major entitlement program has grown significantly under the Obama administration, but the White House has not uttered a word about its plan to address the unsustainable financial future facing the country.

The country needs to do better, and time is running out. We do not know exactly how far off the cliff is, but we are approaching it quickly.

 Litow is a retired actuary and chairman of the Social Insurance Public Finance Section of the Society of Actuaries.

 Matthews is a resident scholar with the Institute for Policy Innovation in Dallas.

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